INTERNATIONAL MACROECONOMIC ACTIVITY AND ITS INTERACTION: EVIDENCE FROM US, JAPAN, GERMANY, CHINA, INDIA AND RUSSIA

Abstract

Using the Diebold and Yilmaz (2012) spillover method, this study attempts to evaluate the strength and direction of cross-country interactions of macroeconomic activity across US, Japan, Germany, China, India and Russia. Apart from a base model, it frames two alternative models; one is based on principal component analysis (PCA) incorporating important macroeconomic variables from each country and another model is based on industrial production index; both evaluate the robustness of our empirical findings. It finds that 62% of variations in growth rates of all six countries are due to their mutual interdependence among them and it also reflects that the emerging economies like China and Russia take the lead in influencing foreign economic activities. It suggests that the concrete policy action is required to diversify the international market interdependency of a domestic economy as it may jeopardise the macroeconomic stability when uncertainty is generated in foreign economies. The empirical analysis is found to be robust.